The International Monetary Fund (IMF) launches an alert. “We are entering a dangerous phase in which economic growth remains low by historical standards and financial risks have increased, but inflation has not yet turned around.”
This is indicated by Pierre-Oliver Gourinchas, chief economist of the IMF in the preface of the report that the Fund presented this Tuesday in the framework of the spring meeting that it celebrates with the World Bank. The title of the report is eloquent: "A rocky recovery."
This pairing of inflation, much more resistant than thought, and the destabilization of the banking system, the result of the rise in interest rates in the fight against rising prices like a fish that bites its tail, causes that, as already The director of the IMF, Kristalina Georgieva, anticipated the world economic outlook will drop in this update in which the cumulative effects of the pandemic and the impact of the war unleashed by Russia in Ukraine still persist.
"The world economy is still at a very uncertain time," the document underlines. From a global growth of 3.4% in 2022, there is a prediction of 2.8% for 2023 and 3% in 2024, one tenth less in each case compared to the forecasts of last January, the forecast for lowest medium term in decades.
In a plausible alternative scenario with increased stress on the financial sector, this global growth could fall to 2.5% this year, the weakest growth since the global recession of 2001, barring the initial covid crisis in 2020 and throughout the global financial crisis of 2009.
This extra drop of three tenths is explained "by a situation in which banks, faced with an increasing cost of financing and the need to act more prudently, reduce credit even more," he indicates.
The setback in economic growth especially affects advanced nations, where the cooling is pronounced. It goes from 2.7% in 2022 to 1.3% in 2023 and 1.4% in 2024. In the aforementioned alternative scenario, growth for this year would fall below 1%.
The countries of the euro area (from 3.5% to 0.8% in this 2023) and the United Kingdom (from 4% to a negative growth of 0.3%) are the most affected by the slowdown. Spain falls from a growth of 5.5% in 2022 to a perspective of 1.5% this year (an improvement of four tenths compared to January) and to 2% in 2024, with a loss of four tenths compared to the previous report.
Despite this more pronounced fall, Spain remains the country with the highest growth in relation to its advanced economy environment, even higher than the United States (1% for 2023 and 1.3% in 2024).
Inflation will drop, but more slowly than previously thought, from 8.7% last year to 7% in 2023 and 4.9% in 2024. "Inflation is much more attached than expected planned," he says. The synchronization of central banks to raise interest rates to tame the price increase should start to bear fruit, he says. But the labor market, which should already be starting to show signs of softening, continues to show strong resilience. In this way, he backs down the idea of having a “soft landing” as a result of this persevering inflation and the recent fluctuations in the financial sector in Europe and the US.
“This anemic global outlook reflects the tough policy stances needed to reduce inflation, the consequences of the recent deterioration in financial conditions, the ongoing war in Ukraine, and rampant geoeconomic fragmentation,” the report stresses.
Currently, the IMF maintains, the world economy is not expected to return to the growth rates that prevailed before the pandemic in the medium term. Looking to 2028, the growth forecast is 3%, the lowest medium-term projection since the Fund began publishing its outlook in 1990.
“The risks to the forecasts are directly to the downside,” the report underlines. The clouds of uncertainty are based on the adjustments to the shocks registered between 2020 and 2022 and the recent turmoil in the financial sector, while “concerns about the recession have gained prominence, while unease about persistently high inflation persists ”.
Gourinchas warns in his introduction that beneath the surface where the economy appears to be pointing to recovery, "turmoil is building and the situation is quite fragile, as a recent episode of banking instability reminded us," he says.
“More worrying is that the sharp policy tightening of the past 12 months is starting to have spillover effects for the financial sector, as we have repeatedly warned could,” the report said.
But the document reiterates that regulators must keep a firm hand in the fight against high prices. “The appropriate course of action depends on the state of the financial system. If it remains reasonably stable, as it has been until now, monetary policy should remain firmly focused on reducing inflation”, he explains.
“One silver lining is that the banking turmoil will help slow aggregate activity and banks will reduce lending,” the opinion continues. This, moreover, should mitigate the need for further tightening of monetary policy.
He qualifies, however, that any expectation of central banks to abandon the fight against inflation will have the opposite effect: "drop in yields, support for activity beyond what is justified and complications in their tasks."
Furthermore, he considers that a stricter fiscal policy can also play an active role. By cooling economic activity, he would support monetary policy, making it easier for interest rates to return to their natural low level faster.
The paper notes that, should a systemic financial crisis loom, a careful and timely recalibration of policy will be needed to safeguard both the financial system and economic activity. He says that regulators and supervisors should act quickly before these tremors so that they do not become a full-blown financial earthquake.
